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Residential needs no ‘accelerator’ to attract investors

Capturing nearly 60% of the sector-specific private real estate capital raised in last quarter, housing funds are proving they are able to maintain institutional support.

More than a year into the covid-19 era, ‘acceleration’ has been the buzzword for the pandemic’s impact on institutional real estate’s various property types.

An accelerated uptick in e-commerce has been a tailwind for the rising logistics sector, while forced closures accelerated the headwinds facing offices and shopping malls. Data centers have become entrenched in the real estate mainstream and the perpetual boom-and-bust cycle for hospitality has, guess what, accelerated.

But there is a property type that has had a somewhat neutral response to covid-19. Without the excess clamor or commentary, it has remained a favorite for institutional investors – residential.

Certainly, private capital raising trends support the notion. Last quarter, residential-focused funds accounted for 57 percent of sector-specific closings, according to PERE’s Q1 fundraising report. The property type surpassed industrial as the top destination for single-sector capital – during the fourth quarter of 2020, industrial vehicles were 48 percent of pool compared to residential’s 44 percent.

The residential sector did not enter the covid-19 era with the sharp upward trajectory of industrial or, indeed, the downward spiral of retail. It appealed to investors looking to diversify away from legacy assets. But there was no indication it would become the industry’s darling. In fact, rampant unemployment at the onset of the pandemic raised doubts about how many apartment dwellers could – or would – continue to pay rent.

Despite those fears, payments continued to pour in thanks to copious levels of governmental support, particularly in the US, which has spent more than $5 trillion to keep its economy stable. As a result, monthly collections never dipped below 93 percent, according to the National Multifamily Housing Council, even with a countrywide eviction moratorium. With the Biden administration calling for more low-income housing funding in its new tax plan, that governmental support is unlike to waver.

Along with the efficacy of stimulus checks, the growing appeal of residential funds is a testament to the evolution of the rental housing sector. An industry-wide pivot to Sunbelt markets and an embrace of single-family homes have positioned it to ride the wave of relocations that took place this past year. Covid boom towns in Florida, Texas and Georgia have been hotbeds for institutional investment in recent years.

Likewise, managers that embraced non-traditional strategies have been rewarded. New York-based JEN Partners, for example, had the third-biggest residential-specific close last quarter, with $550 million for its JEN VII fund, which aggregates land for homebuilders. Similarly, Seattle’s Freestone Capital Management notched $423 million for its third vehicle to invest in manufactured housing. The biggest close of the quarter was still held by a traditional value-add multifamily specialist, with Chicago-based Waterton tallying $1.5 billion for its 14th Residential Property Venture. But the tide is turning.

Meanwhile, as the options for residential investment become more plentiful, the global thirst for industrial assets has only made them scarcer and more expensive. This surge of popularity and pricing raises questions about how profitable the logistics warehouse sector will be in the long run, whereas the housing sector has shown its ability to perform consistently through turbulent times – even a pandemic.

As the rental housing sector continues to be more dynamic and matures in markets outside the US, residential funds are likely to be capital magnets for many quarters to come.